Given that over 2.8 million super accounts will be moving from accumulation to the pension phase over the next decade, is it time to consider the implications of how member assets are pooled?
A new paper from Parametric managing director, research Raewyn Williams argues that the decisions these retirees make - keep their savings in their super fund, change funds, go self-managed or exit the system entirely - will "hugely influence the destiny of superannuation funds, so it’s critical they use their best thinking, and devote adequate resources, to ensure they get this decision right.”
One potential solution, the paper says, is to segregate member assets into separate accumulation and pension pools.
While noting "there's no hard and fast rule on what the best approach is," there are quantifiable benefits for segregation. As one example, the paper cites the "performance drag on international equity pension portfolios from foreign dividend withholding tax."
Williams adds: "This drag—38 basis points on a passive international equity portfolio over 2018—is a permanent cost to pension (but not accumulation) members and can be addressed if super funds can design exposures specifically for pension pools."
She continues: "For another example, consider the idea of ‘franking-credit-tilted’ Australian equities. Our previous research has identified the additional risks introduced into an accumulation portfolio to target this extra source of yield. But does this evaluation change if a segregated pension portfolio can double the extra yield for the same amount of risk—or redefine its definition of risk entirely?
“And how asset segregation would be implemented is also relevant to any decision and shouldn’t be parked for a later investigation.”
Less quantifiable factors included the ability to choose strategies "that better match pension member risk preferences" and setting higher liquidity rules for pension members while harvesting an illiquidity premium for accumulation members.
With an increased focus on how the Australian super system will manage a significant transition of members into retirement, these considerations are more important than ever.
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